The European Central Bank cut interest rates to 3.75 percent from 4 percent on Thursday, the first time it has cut rates since 2019. The bank’s move marked a divergence from the U.S. Federal Reserve, which is maintaining high interest rates in the face of stubborn inflation.
Like central banks around the world, the E.C.B. had raised interest rates over the past two years to fight a surge in inflation as the global economy rebounded from the Covid-19 pandemic.
The E.C.B., following the Fed’s lead, began raising interest rates in July 2022, ending an era of negative rates. The increase, half a percentage point, was the first of 10 straight for the European bank, taking rates to the highest level in the bank’s history. It has held rates steady since September, and inflation in the eurozone is now lower than in the United States.
Inflation has been a persistent problem for European governments and policymakers over the past few years. Supply chain disruptions hit European economies particularly hard. In addition, Russia’s invasion of Ukraine in February 2022 led to soaring energy prices, and inflation reached 10 percent in September 2022.
By this May, though, inflation had fallen to 2.6 percent in the eurozone, just above the E.C.B.’s target of 2 percent. At the same time, the economy of the eurozone has slowed, growing just 0.3 percent in the first quarter of 2024.
Even as the E.C.B. cuts rates, the Fed has signaled that it will not be doing so anytime soon. While the economy of the eurozone has stagnated in the E.C.B.’s bid to tame inflation, the U.S. economy has not been slowed as much by the higher rates. Prices have also continued to rise faster than the Fed’s 2 percent target.
“There has already been divergence in the economies,” said Mariano Cena, an economist at Barclays. “So if there is divergence in policy, it’s because it follows the different trajectories of the economies.”